As a small business owner, you may already be looking into ways to increase your Net Operating Income by lowering your Operating Expenses.
For various reasons, the two trends we are seeing relating to energy usage in mid-2022 are;
1. The price of energy is increasing around the world for consumers and businesses, and;
2. Commercial and industrial customers are paying the lion’s share of the cost in the United States.
According to the U.S. Energy Information Administration, over 60% of all electricity sales in the U.S. are made to Commercial and Industrial customers.
Knowing more about the process of how your electric utility bills your business for electricity and understanding the major components of your electric bill will help determine if you could be saving money on that fundamental operating expense.
Major Components of your Electric Bill
The U.S. electric grid is comprised of ten different service territories, operated by Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs), in both regulated and deregulated markets (like Texas). Rather than break down what each system operator bill looks like, let's focus on the major components of an electric bill where there may be some ability to lower costs.
kW – Kilowatt, the unit most commonly used to measure energy by utilities. Equal to a thousand Watts.
kWh – Kilowatt-Hour, the amount of energy a device or machine requires to operate for one hour. For a machine that requires 1 kW of energy to perform its task, running that machine for 3 hours will have used up 3 kilowatt-Hours (kWh).
Demand (kW) – Measured in kilowatts, demand represents the rate of energy usage. Utilities may charge based on average demand for the period, or even peak demand. The demand section of an electric bill is usually an area where savings can be found because utilities charge higher rates to encourage reduced demand. Some utilities even charge commercial & industrial customers for their consumption based on the time of the day (On Peak vs Off Peak), or even the season of the year (Winter vs Summer), when energy is consumed. For many commercial & industrial consumers, a time-of-use-based plan can provide great savings. Understanding the way utilities bill for demand and being able to shift operations to times where the cost of energy is lower is a great way to control energy costs.
Consumption (kWh) – Measured in kilowatt-hours, consumption is the amount of energy used over the billing period. Monthly consumption is an area where savings can be found by making sure businesses are using energy efficient equipment where possible, including something as simple as switching from older incandescent lightbulbs to LED lights. In addition, total consumption can be reduced by installing a behind-the-meter (Net Metered) solar photovoltaic (PV) system which generates consumable electricity during the day (generally the expensive usage times for electricity rates) instead of purchasing costly utility power.
Customer Charges – A base rate that is applied monthly to the electric bill regardless of the amount of energy consumed in that bill period. This rate varies depending on the Utility Rate Schedule or Electricity Plan selected. This is not an area where large savings can be had in general.
Transmission Charges – The cost of delivery of power from utility power plants (coal/gas fueled) to utility substations which then distribute that power to the surrounding region. Savings can be obtained in this area of your bill by reducing overall consumption and making sure the most appropriate plan for the business usage profile has been chosen (using 12-months or more of historical monthly consumption and demand for a full picture analysis).
Distribution Charges – The cost of delivering power from the source (generally a utility substation) to the consumer. Like transmission charges this is not an area where large savings can be had, however, charges for transmission and distribution are sometimes ‘tiered’ and so it is important to understand average monthly usage to ensure these charges match the tier. Businesses that frequently consume more energy than their tier provides for may consider switching to a higher tier, or look for ways to reduce consumption.
Ancillary Services –these are services, or tools, that grid operators employ to help ensure grid stability and efficiency. Given the important nature of maintaining the grid, these services are also the most expensive to provide. There are currently several types of ancillary services utilized across the entire U.S. electric grid, and their availability varies by geography. Currently, there are six types of ancillary service categories: Scheduling and dispatch (can be real-time, or Day-Ahead); reactive power and voltage control; loss compensation; load following; system protection; and energy imbalance.
As the grid is modernized and distributed energy resources are increased, more ancillary services may become available in the future.
Many of these fees can be out of consumers' control as they can be defined as ‘non-energy costs’, they are not fixed rates, and the rates can fluctuate unpredictably based on real-time market events (like extreme weather). However, as Wikipedia states, "...almost all charges related to ancillary services are based on the consumer's electrical usage". Therefore, the majority of consumers are billed at the ancillary service rate for that service multiplied by their total consumption over that period.
Reducing overall consumption coupled with energy efficient equipment upgrades and installing solar, or solar plus battery storage (to reduce peak demand costs, also known as peak-shaving or peak-shifting), will greatly help reduce these ancillary costs (not the rate, but kWh billed against).
Recalling the ‘Texas Freeze of 2021’, ancillary service charges were the reason some customers received an electric bill for thousands of dollars while they were freezing through power outages on fixed-rate contracts. Commercial & Industrial consumers are the most impacted by these fees, as they are the largest consumers, and should be encouraged to read through their electricity plan and fully understand how ancillary fees are incurred. In deregulated markets like Texas's ERCOT, small commercial customers (less than 50 kW peak demand) cannot legally pass through ancillary service charges on bills from retail energy providers.
Generally, every business needs electricity to operate. It is ‘watts’ affecting your business every day!
Energy is a fundamental resource, and businesses that better understand how to reduce energy costs, control energy usage, and use energy more efficiently allow their bottom line to benefit from this knowledge.
Resources
https://www.iea.org/commentaries/what-is-behind-soaring-energy-prices-and-what-happens-next
https://www.ferc.gov/electric-power-markets
https://atrius.com/blogs/the-difference-between-electricity-demand-and-electricity-consumption/
https://en.wikipedia.org/wiki/Ancillary_services_(electric_power)
https://electricityplans.com/texas-ancillary-services/
